Advanced Bollinger Strategy

The advanced Bollinger strategy is designed to use the Bollinger bands to trade ranging currencies. There are currencies that typically have a wide intraday range and to traders can use this strategy to catch reversal points along the way.

The success of this trading system is hinged around the appearance of the inside day candlestick formation, which will form the basis of entry confirmations. This is what it looks like:

inside day candle formation

An inside day candle is formed as follows:

The Day 1 candle (the first candle) has a higher high and a lower low than the Day 2 candle (the second candle). Sometimes, the lows of both candles may be at the same level while the high of Day 1 > Day 2 high. In other words, the Day 1 candle envelops the Day 2 candle, or the Day 2 candle is “inside” the Day 1 candle. The picture says it all.

This formation has to occur at either extremes of the Bollinger band indicator for a trade signal to be initiated.

Strategy Setup

This strategy is best used on the 1hr, 4hr and long term time charts such as the Daily chart. This trading strategy does well with 3 indicators, but the addition of the pivot point calculator helps to provide a confirmation on whether the price of the currency asset has topped or bottomed out.

Setup the three (or four) indicators as indicated below.

a)    Bollinger band (at default settings of 20 Period, 2.0 Multiple and SMA).

b)    Stochastics oscillator set to 5,3,3 (default settings).

c)     20-day simple moving average (20SMA). This SMA corresponds to the middle Bollinger, but it should be demarcated for clarity.

d)    Autopivot calculator.

Long Entry

The trader should execute a long trade if the following criteria are met:

a)    The Inside day candle forms and touches, or cuts the lower Bollinger band.

b)    If the Stochastics oscillator crosses at <25, indicating an oversold market condition.

Once this happens, the EA should automatically go long at the open of the next candle. If this situation occurs at a support line as shown by the Autopivot calculator, the signal is reinforced. If the entry point is higher than the high of the 2^nd candle in the inside day formation (Day 2 candle), the signal is more reliable. 

Example 1

Chart showing long entry setup and strength of the signal when the third candle’s open is very close to, or higher than the 2^nd candle’s high 

Short Entry

The trader should execute a long trade if the following criteria are met:

a)    The inside day candle forms and touches or cuts above the upper Bollinger band.

b)    The Stochastics crosses at >75, indicating an overbought market condition.

Once this happens, the trader should open a short position at the open of the next candle. If the entry point is lower than the low of the 2^nd candle in the inside day formation (Day 2 candle), the signal is more reliable. If this situation occurs at a support line as shown by the Autopivot calculator, the signal is reinforced.

Setting the Stop Loss and Profit Targets for this Strategy

The stop loss for the Advanced Bollinger band system should be placed 20 pips above (for short entry) or below (for long entry) the Day 1 candlestick in the inside day candle formation.

Since the strategy is used to catch a top or bottom of a trend and follow it until the condition changes, the trailing stop profit strategy is used. This is where the 20SMA comes in. Once the market breaks the 20SMA in the trade direction, the EA should open a 20 pip trailing stop to start trailing the price action. For a SHORT entry, the trailing stop should be set when the price action breaks below the 20SMA, and for a LONG entry, the trailing stop is set when the price action breaks above the 20SMA.

Another way of taking profits is to wait until the currency price starts to retrace and touches the 20SMA. So for a long trade, the trader could wait until the currency price starts to retrace downwards and touches the SMA before closing the trade manually. For a short trade, the trader could wait until the currency price takes a bounce off the bottom and close the trade manually when the price action hits the 20SMA.